In the last video, we
talked about pensions and how they're
defined benefit plans and how they could
to get underfunded or how there could be temptation
for people to underfund them. In this video, I want to
make things a little bit more concrete by looking
at actual numbers, especially at the state level. So right over here is a map of,
obviously, the United States. And what it shows is how funded
the pension liabilities are in the different states. So for example-- actually,
Texas, for example, 83% of their pension
liabilities are funded. They've set aside 83% of
the right amount of money to fund their pension
obligations, not 100%. It is underfunded,
but it's not crazy. California, pretty high, 78%. But one of these states is
probably jumping out at you, probably because it
has been shaded in red. And that is the
state of Illinois, and Illinois is in
trouble because it's only funded 45% of its
pension obligations. And Illinois really jumps
out because it's in red, but there's a lot of states that
are pretty close to Illinois. Louisiana, 56%. Oklahoma, 56%. Kentucky, 54%. West Virginia, 58%. And this is an issue
because they've set aside, in the past, very little
money for the pension obligations that are
starting to hit now, especially that you have
a retiring baby boomer population. And in order to meet
those obligations, those promised
obligations, they're going to have to dig into
money that was being spent other places, that
going in the past when they were underfunding
the pension, they were able to fund
other things nicely, but not fund the pension and kind of
kick the can down the road. But now that the can can't
be kicked any further, it's going to have to
go the other way around. You're going to have to
take money from other things to fund your pensions. And to make it clear, let's
focus on the state of Illinois. So this right over here. There's a couple
of things going on. In this kind of yellow ochre
color-- and I'll circle it in yellow ochre--
they were talking about the total liabilities. And just to make
this graph clear, it's not just the yellow ochre
part that's total liabilities. The entire height of
each of these bars is the total
liabilities, and you see how it has just
completely blossomed here. And there's a lot of things that
go into the total liabilities, the same things that we talked
about in the last video. There are things like
return on investment. If you are in a low
interest rate environment, like we are now-- for example,
my money in my savings account, I think, is getting
like 0.4% interest. It's getting pretty
much no interest. If you're in a low
interest rate environment, if you're not getting good
returns-- and a lot of pensions tend to go into
very safe assets, but those are getting
very low returns. You're going to have to
set aside more money, and so you see these
obligations essentially just growing dramatically. On top of that, you
have things like cost of living adjustments. These are attempts at kind
of factoring in inflation, how much things are
costing in that region. But they are also
sometimes negotiated. And sometimes, and especially
in the case of Illinois, they've grown faster than
the rate of inflation. And so you have
these liabilities, and you see that they're getting
less and less well funded. So if we go right
over here, this is what this green line
is, the funding ratio. So how well funded
are these liabilities? Say the red part of the bar is
the part that is not paid for. And the green is
the ratio of the red or is the ratio of what
is funded, essentially this higher part. It's the ratio of
this part right over here to the entire bar. And you see right over here,
Illinois is in a bad situation. Their total liabilities
are 138 billion. This is in millions, so
it's 138,000 million. So it's 138 billion. This is for one state. And 85 or 86 billion
of that is unfunded, that they have to
figure out some way to get the money because
the right amount of money was not being set aside. And to do that,
they're going to have to dig in into other things. So this right over here, this
is the pension contribution. Let me circle this. So in this yellow
color, once again, this is the pension
contribution. And now the state, they're
going to have to-- in order to get to a funded
position, they're going to make up for all of
the underfunding of the past and also the other factors that
are making this obligation even larger. They're going to have to
dig into other things. So you see right
over here in yellow, these are the
contributions that they're going to have to
make for the pension. And you see that growing. It's growing to in excess by
2018 of $6 billion a year. But what's really
fascinating about this graph is it's passing up total
education funding in the state. So the cost of
funding retirements for people who have already
done service for the state but aren't in service
to the state right now is going to pass up-- and
this is happening very soon-- is going to pass
up actual spending on a state-wide
basis on education. And at the state
level, education is a major, major,
major expenditure. So it's going to be passing
up a major expenditure, very important expenditure for
the future of the state based on past obligations. And to understand
where this is going-- and just to understand
Illinois' situation, there's 750,000
Illinois-- I don't know how to say this--
Illinoians, Illinoisians, who are members of the
state's five pension system. So this is the Teachers
Retirement System. This is the State Universities
Retirement System. This is the State Employees
Retirement System. This is the Judges
Retirement System. You see there's a lot
fewer judges than that. There's many more teachers
who've been retired, many who have been in
the state universities. And this right over here
is the General Assembly. Very few people who are in
the Illinois state assembly. And you can see kind
of comparable salaries. This is the retirement
benefit, not just the salaries. This is how much on
average these folks are getting once they
retire on an annual basis. So you see that they're
pretty reasonable, especially for the
judges, although they are a small fraction. But in all fairness, this
was promised to these people. They planned. The probably took
lower compensation while they were working
with the expectation that they would be able to
get these benefits once they retired. They also probably stayed
in the jobs longer. This is a way of
retaining employees, because they knew that they
were going to get this benefit. So you might say, oh, these are
really, really great benefits. But at the same time,
these people probably sacrificed other things in
order to get these benefits now. But it's a very hard question. When you look at this, you say,
well, these people, they've done service. They put these expectations. But at the same
time, you're like, well, this is
really cutting in-- and this is just one
thing that I'm showing. It's really cutting into
very important areas of investment for
the entire state. So the whole reason of
really just surfacing this, this whole pension
issue, is just to put this in. And hopefully people
understand what the issues are, because that's the only way that
fairly hard decisions are going to have to be made, decisions
on cutting necessary investment or restructuring or who
knows what it might be. I don't envy the people who
have to make these decisions.